Surviving the Investment Income Famine

Senior America has a problem. The end of the money is coming before the end of the month. Strangely, the more savings you have, the bigger the problem.

Why is this happening?

Call it “The Great Investment Income Famine.” Retirees with savings have seen their income plummet.

According to the 2009 Social Security Fact Book, for instance, Social Security accounts for 90 percent, or more, of all cash income for 44 percent of all Social Security recipients who are single. That’s a lot of people. For them, little has changed. They worry about income in good times and bad.

But that’s not everyone. Nearly half of all married Social Security recipients get more than half of their income from investments and pensions. For them, the last few years have been a disaster.

Here’s a back-of-the-envelope estimate. In 2006 the yield on a 5-year Treasury obligation was 4.35 percent. Today it is 2.34 percent. That translates into a 23 percent drop in income if you got half your income from Social Security, half from interest. It’s a whopping 35 percent decline for the prudent saver/investors who got less than a quarter of their income from Social Security and the rest from interest.

Whatever the actual loss, it requires more than giving up cake. Yet the policies pursued by both the Bush and Obama administrations through the Federal Reserve amount to telling retirees to eat cake, in the tradition of Marie Antoinette.

So what can a senior do? Here’s a list of tools. Yes, they involve some risk, but action is better than waiting for help from our government.

Real estate investment trusts (REITs) also provide good income. Our government may not be working hard to do much for retirees, but it is working hard to reflate real estate values and improve access to financing. The iShares residential REIT (ticker: REZ, expense ratio: 0.48 percent) was recently yielding 5.5 percent. The Vanguard REIT ETF (ticker: VNQ, expense ratio: 0.15 percent) covers the entire REIT sector and yields about the same. HCP Inc., a health care REIT (ticker: HCP), yields about 6 percent.

This is not what most people are doing. Instead, investors have piled into low-yield bond funds. This makes them vulnerable if interest rates rise with a stronger economy or a weaker dollar.

Go for high-yield stocks.

There was a time when I hated Altria, the assumed name for cigarette maker Philip Morris, but after 50 years of common knowledge that smoking is bad for your health, I don’t feel any qualms about owning the shares. Altria Group (ticker: MO) currently yields 6.7 percent, taxable at only 15 percent, so you get to keep most of the dividend. Similarly, Kinder Morgan Energy (ticker: KMP) yields 6.6 percent, but the yield is fully taxable. Many of the drug stocks that are sucking the Treasury and citizens dry also provide high yields. Bristol-Myers Squibb (ticker: BMY), for instance, yields 5.2 percent.

If you don’t want to build a portfolio of individual stocks, you can still increase your income by buying ETFs with a value twist. Vanguard Value ETF (ticker: VTV, expense ratio: 0.15 percent) yields 2.89 percent. You can also gain by international diversification. The Vanguard International Value fund (ticker: VTRIX, expense ratio: 0.42 percent) was recently yielding 3.3 percent.

(Full disclosure: While the bulk of my assets are in index funds, including REZ, I own shares of HCP, MO, KMP, and BMY.)

Make a life-or-death bet.

You can increase your cash flow (not your actual return) with the purchase of a life annuity. Your return will be zero or less if you die young, but it can be reasonable if you live to expectancy or beyond. A 65-year-old male, for instance, can get a cash benefit equal to about 7.6 percent of premium paid. To explore different life annuities, visit www.immediateannuities.com.

This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational puposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.

AssetBuilder Inc. is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and expenses carefully before investing.